Auto Loans the Next Subprime: Jamie Dimon (JPM)

Following news earlier this week that U.S. auto industry sales fell by 6% in May, JP Morgan Chase & Co (JPM) CEO Jamie Dimon, in a meeting with investors on Thursday, warned that the market for auto lending looked “a little stressed.” While reassuring investors that JP Morgan Chase was safe, Dimon projected that competing banks would likely see increased losses.

Auto Boom

The recent drop in sales for the month of May comes on the heels of the best year on record for auto sales. U.S. auto sales reached 17.47 million vehicles for all of 2015, a number which breaks the previous record of 17.41 million set in 2000. (To read more, see: Ford’s May Auto Sales Disappoint.)

While low fuel prices and moderate economic growth have been cited as reasons for the boom, easy credit, especially for subprime borrowers, cannot be ignored.

In 2015, average financing for a new car loan rose to nearly $28,000, the highest level since March 2008, when the Federal Reserve first began collecting such data. Much of the growth in auto financing is being led by subprime auto loans, which, as of March, made up a record 20.8% of the new auto loan market.

Increasing Defaults

The “stress” in the auto loan market that Dimon mentioned is no doubt in reference to the uptick in defaults amongst subprime borrowers. According to Fitch Ratings, while the rate of defaults on subprime auto loans experienced a slight reprieve in March falling to 4.15%, this drop comes after the rate reached a 20-year high in February of 5.16%.

The rate of annualized net losses in March, while also down from the previous month, were still 30.4% higher over the same period from the previous year. Fitch cited lax underwriting standards as one of the causes for the increase in subprime auto loans, and this increase in subprime lending is expected to push delinquency and loss levels higher. (To read more, see: Subprime Auto Loans: What Borrowers Should Know.)

The Bottom Line

The spike in subprime auto loans coupled with increasing delinquency rates and now falling auto sales sounds reminiscent of an episode that began nearly 10 years ago.

While some believe that differences between the automobile market and housing market make worries of a new financial crisis overblown, the situation could become problematic if large-scale defaults begin having downward pressure on automobile prices making it difficult for repossessed vehicles to be resold by lenders trying to recoup losses.

While noting that JP Morgan is safe, Dimon was quoted as saying, “Someone will get hurt in auto lending.”

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